Banks face legal charges from the past
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Rabobank is just the last bank to have reached a record settlement of $1.07 billion for
alleged misconduct in the libor and other interest rates manipulation scandal.
Barclays is also facing a $700m charge after losing the appeal with hedge fund diamond capital.
Legal charges have also impacted Q3 results of UBS, which now faces
higher provision requirements from the FINMA, and Deutsche Bank that had to increase
litigation reserves of 1.2 billion to 4.1 billion Euro. The situation of
Deutsche Bank is different as it did not yet reach a settlement with the regulators.
This uncertainty over possible further legal charges makes it difficult for
investors to assess the real litigation risk faced by some of these banks.
Banks are therefore going to face higher legal charges and might be required by
regulators, like in the case of UBS, to hold more capital.
Investors can benefit from this volatility in the sector by paying attention to
some unique situations in the industry like:
– Swiss banks maintain a competitive advantage as the regulator moved very quickly
after the crisis to increase capital requirements and do not face the same issue
of other European banks where bad loans have reached $1.7 Trillion ;
– Some Europe banks have no pending legal charges and limited exposure to bad loans
and are a good opportunity for investors;
Given that non performing loans in Europe have double in the last 4 years the environment
will remain challenging. Swiss banks will improve and maintain their strong position in
some banking areas e.g. wealth management.
European banks & bad loans
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The increase of European banks bad loans to $1.7 billion raises the question on how
banks will prepare for the next year stress test but, and perhaps more importantly,
how this might impact access to credit in many european economies that need financing to
fuel growth.
In Short
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– Litigation risks represent a big challenge for banks and investors that need to
assess how this will impact their future results;
– Swiss banks maintain their competitive advantage due to the strong capital base and the already
reformed Swiss regulatory environment;
– European banks operate in a more challenging environment with higher bad loans and the need to reinforce their capital positions well ahead of the 2014 stress tests.